By Sitaraman Shankar
LONDON, March 17 (Reuters) - European shares tumbled by more
than 3 percent early on Monday as a distress sale of Bear
Stearns <BSC.N> pushed rattled investors to dump financials,
fearing contagion across the banking system.
The euro hit a new high against the dollar and crude
continued to surge to new records, compounding the woes of
companies in the region.
At 0920 GMT, the FTSEurofirst 300 <> was down 3.2
percent at 1,215.32, tracking big losses in the United States
and Asia after JP Morgan <JPM.N> unveiled a takeover of stricken
rival Bear Stearns at a rock-bottom price.
Banks led losers, with UBS <UBSN.VX>, Royal Bank of Scotland
<RBS.L> and Barclays <BARC.L> all falling more than 8 percent.
HBOS <HBOS.L> and Alliance & Leicester <ALLL.L> slid more than
11 percent.
"There's turmoil in all markets after Bear Stearns, and
equities is not the place to be," said BNP Paribas strategist
Edmund Shing.
"Everyone's asking: Who's next? Is there a Bear Stearns in
Europe, could investment banks start to fail?"
"It's clear that Bear was by far the most exposed to
mortgage-backed securities relative to their size and were also
hit by failure of their internal hedge funds," he said, but
added there was uncertainty about the extent of European bank
losses.
Investors were also on edge ahead of earnings reports later
in the week from top U.S. investment banks.
The Fed cut its discount rate on Sunday by a quarter point
to 3.25 percent and launched a new facility that would allow
U.S. primary dealers, mainly investment banks, to tap the
discount window in a tool not used since the Great Depression.
Across Europe, Britain's FTSE 100 <> was down 2.6
percent, Germany's DAX <> slumped 3.8 percent and France's
CAC <> lost 3 percent.
The euro a new high of $1.5904, and oil was trading 1
percent higher at $111.29 a barrel, having hit a record $111.80
earlier.
PROFIT WARNING GROUNDS SIEMENS
The DAX's underperformance was driven by a profit warning
from engineering heavyweight Siemens <SIEGn.DE>, which tumbled
12 percent.
"With today's bad news -- basically another 1 billion euros
in shareholders' equity lost -- we believe sentiment and
investor confidence will hardly improve," Cheuvreux said of
Siemens in a note. Rival Alstom <ALSO.PA> slid 7 percent.
But there were big gainers that stuck out in the sea of red.
British Energy <BGY.L> soared 17 percent after saying it was
in talks that could lead to a business combination or an offer.
Greece's OTE <OTEr.AT> jumped 11.6 percent after Deutsche
Telekom <DTEGn.DE> said it was buying a 20 percent stake in the
company.
But analysts focused on the bigger picture, with some saying
the JP Morgan move on Bear Stearns was a positive in the longer
run.
"This is not good news for business, or for those who work
there, but it must happen as the Fed can't keep propping up
banks. There must be blood and this is part of it," said Justin
Urquhart Stewart at 7 Investment Management.
All eyes are on the Fed again before its rate-setting
meeting on Tuesday. Fed fund futures showed an 88 percent chance
that it will serve up a 100 basis point cut on Tuesday in the
federal funds rate.
Credit spread widened in Europe, with fears that liquidity
problems could extend to other banks driving credit default
swaps for banks wider.
"The Fed has to keep on cutting interest rates even if the
widening spreads in the credit markets are currently frustrating
its efforts to loosen monetary conditions," Brewin Dolphin chief
strategist Mike Lenhoff said in a note.
(Additional reporting by Eva Kuehnen in Frankfurt; Editing by
Quentin Bryar)
